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GOP Intellectual Decline, Monetary Edition

August 24, 2012 3:42 pmAugust 24, 2012 3:42 pm

There was a time, not long ago, when Republicans — whatever you might think of their other ideas — were part of the mainstream consensus on monetary policy. Here’s the Economic Report of the President from 2004 (pdf), presumably written by Greg Mankiw:

Aggressive monetary policy can reduce the depth of a recession.

But now we have Mitt Romney declaring his intention to replace Ben Bernanke for, um, pursuing aggressive monetary policy to fight a recession (not aggressive enough, but that’s another issue). Romney:

I want to make sure the Federal Reserve focuses on maintaining the monetary stability that leads to a strong dollar and confidence that America is not going to go down the road that other nations have gone down,
to their peril.

And the GOP platform will reportedly include a call for steps toward a return to the gold standard.

The really strange thing about all this is that this turn toward hard-money mysticism is taking place even as events have demonstrated that the advantages of not being on a gold standard, of having a fiat currency
that can be printed freely in emergencies, are even greater than standard analysis had supposed.

Mark Thoma links to an old piece of mine that I think
does a pretty good job of laying out that standard case; but we now know that there’s a major additional concern, the ability of the central bank to act as lender of last resort to the government as well
as private banks. Consider, as Paul De Grauwe has in one of the most important analyses (pdf) to come out of the crisis, the contrast between Spain and the UK. Their medium-term fiscal outlooks are comparable, at least according to the IMF:

Source: IMF

But borrowing costs have soared in Spain, while falling in Britain:

Source: Eurostat

So the GOP has decided that we must reject the evils of fiat money and go for the gold standard at precisely the moment when events have demonstrated that fiat money is a really useful thing and the loss of flexibility
that comes from ending fiat currencies can be utterly disastrous. What’s going on?

I think Yglesias has this right:

Commodity-backed money is basically a solution to a non-problem. Or at least it’s not a problem you have if you don’t accept a Randian deeply moralized view of market outcomes. The existince of fiat
money is embarassing to that kind of ideology, so it inspires quests for alternatives to modern central banking even when the alternatives don’t make sense.

In this sense fiat money is like, oh, Social Security. The problem it creates for conservatives is not that it doesn’t work, but that it does — which is a challenge to their philosophy. And so it must
die.